Option Investor

Daily Newsletter, Wednesday, 8/10/2016

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Stock Market Struggling as Momentum Wanes

by Keene Little

Click here to email Keene Little
Most indexes have been able to push to at least minor new highs this week but they're doing so with waning momentum (as evidenced by lower highs in momentum oscillators) and today's pullback has the potential to develop into something more bearish. But the bulls still have the opportunity to add more points, especially as we head into opex week.

Today's Market Stats

As will be evident in many of the charts shown tonight, the new highs last Friday and into the early part of this week looks bullish but with trading volume at lows not seen for the past couple of years and waning momentum for the rally we have a market that simply looks tired following a strong rally from June. There could be enough money to keep the bears away (the selling pressure has been minimal, although a little stronger today) but we're not seeing the kind of volume the bulls would like to see with a breakout to new price highs. That's a warning sign.

SPY traded 39M shares on Monday, which was the lowest full-day volume for the past couple of years and it was less than half the 50-dma for volume. Traders are simply disappearing from the market and one must wonder where the buying horsepower is going to come from. That's of course a silly question because we know who our Sugar Daddy is.

Part of the problem with attracting more buyers is that more traders are starting to understand better that the fundamentals for the market rally stink. With the earnings season for Q2 winding down, it has turned out to be another disappointing one and the projections for Q3 are no better. Earnings growth for Q2 2016 is shaping up to be about -3.5%, which will be the 5th straight quarter of year-over-year declines and the longest streak since the financial crisis.

With all the reports about how many companies "beat" their earnings expectations you would think it was a good season. But this is how the communication to traders is manipulated so as to keep it looking positive. Most retail traders catch the headlines and the intent by Wall Street is to keep retail traders feeling bullish.

Companies have been consistently revising their earnings projections downward and making sure the Wall Street analysts get this information as early as possible. That way the earnings expectations by the analysts are known before the companies announce the actual results and voila!, the company manages to beat expectations by a penny, joining the many companies beating their (lowered) estimates. Amazing performance, or so the average retail trader believes. It's important to remember the goal of politicians, the Fed and Wall Street is to keep people feeling good about the economy and the stock market because when the mood changes it will have a huge negative impact on both.

As the stock market continues to march higher, as earnings decline, the P/E ratio continues to climb into nosebleed territory, which of course puts us back into bubble territory. Goldman Sachs reports a forward P/E of 18.2, which ranks it in the "98th percentile since 1976." When the P/E ratio has climbed this high in the past it has historically led to subpar (negative) performance for the stock market over the next several years.

As of last Friday sellside analysts now project Q3 earnings to be down -1.7% and these estimates typically get downgraded as the quarter develops (due to companies start downgrading their estimates early in the quarter and feed that info to the analysts). That would make it six quarters in a row with negative year-over-year earnings. According to Factset, "year-over-year earnings are now set to decline -0.3% for the full year, after starting the year at +6%. This would mark the second time the S&P has reported 2 consecutive years of earnings decline since 2008 and 2009." But this time the market is pressing to new all-time highs instead of hitting significant lows. That's a real disconnect between stock market prices and company performance and the resulting high P/E ratio. Eventually the market will correct and my concern is that the market is sitting on top of a huge air pocket with nothing underneath to support it.

The chart below highlights the problem with forward guidance, which has been regularly downgraded as the quarter develops. The chart shows how earnings estimates have changed since March 2015 and how forward estimates have changed since January. As stated on the chart, hope springs eternal with high estimates at the beginning of each quarter and then drops significantly as the quarter develops. And then at the end the companies manage to beat their lowered expectations and everyone is happy. The coming correction to this Bizarro World is likely to be a painful one.

Forward Estimates, 2014 through Q4 2016, chart courtesy RealInvestmentAdvice.com

I'll start tonight's chart review with a look at the granddaddy of the indexes, the Wilshire 5000 (which I just read actually has a little more than 3600 stocks) and then as you'll see, SPX looks very similar and remains a good proxy for the broader market.

Wilshire 5000 index, W5000, Weekly chart
W5000 rallied up to and slightly above its May 2015 high at 22537, which like the other indexes, has many feeling very bullish about the market. But I think the overshoot of resistance at that level will hold on a monthly closing basis. Last week's hanging man doji at resistance could lead to a red candle for this week and that would leave a reversal signal. We don't have that yet so it's just speculation but something I'm watching for.

The bullish pattern is very bullish -- it's looking for a pullback to correct the rally from June 27th and then a screaming rally from there in a 3rd of a 3rd wave. It's the kind of move that would take W5000 well above 25K before the end of this year and up to the 30K area next year. Call me a Doubting Thomas on that one but it's what the bullish pattern supports. The bearish pattern says the May 2015 high was the completion of the rally from 2009 and this month's slight new high is only part of a corrective pattern that is the start of the next cyclical bear within the larger secular bear. It calls for a sharp decline below the February low (18462) before the end of the year. There's a good chance we're going to have a much more volatile market between now and the end of the year than we've seen so far this year.

Wilshire 5000 index, W5000, Daily chart

On Monday and Tuesday W5000 pushed up to the trend line along the highs from April-July, making a new price high but leaving behind a significant bearish divergence on MACD, which tells us the momentum is drying up. The market is simply running out of buyers, be it short covering or real buying. At the same time trading volume is hitting lows not seen all year. This could simply be a sign that we're into the summer doldrums or it could be more bearish than that but in any case, it's a warning sign for bulls to heed. But the bulls have the opportunity to take advantage of a bullish setup with the pullback to the May 2015 high at 22537 (today's low was 22531 and it closed at 22559). It would leave a bullish kiss goodbye following the back-test if it can get a rally going tomorrow. Upside potential is back up to the trend line along the highs, which will be near 22750 by the end of the week. It would turn more bullish above 22800.

S&P 500, SPX, Daily chart

SPX looks very similar to the W5000 but it came a little closer to testing its 20-dma today, near 2170 with this afternoon's low at 2172. If that acts as support to launch another push higher, keep an eye on the trend line along the highs from April-July, which will be near 2195 by Friday. Higher than that I'd then look for the price projection at 2220-2223. But if drops lower and breaks below its August 2nd low near 2147 we should get at least a deeper pullback and the May 2015 high near 2135 and its 50-dma, currently near 2124, would be good downside targets for now.

Key Levels for SPX:
- bullish above 2195
- bearish below 2147

S&P 500, SPX, 30-min chart

The SPX 30-min chart has been providing a good pattern to analyze the short-term wave count, which I am always suspicious of because of the amount of blatant manipulation in this market (EW measures sentiment swings in traders' behavior), but for now it's providing a good road map to follow. The bearish wave pattern would look best with another drop lower, with a downside target at 2167, followed by a larger bounce correction and then lower again. But I could argue for a larger bounce from here and then lower for at least a larger a-b-c pullback pattern (that would keep things bullish and could be a good setup for a pullback before opex week and then launch the buy programs). If we get an immediate drop Thursday morning (reversing the series of small gaps to the upside recently) and it drops below 2167 we could see an acceleration of the selling. Back above 2184 would have me thinking new highs sooner rather than later.

Dow Industrials, INDU, Daily chart

The Dow has not been able to make a new high above it July 20th high at 18622 (the high on Tuesday was 18585) but there's upside potential to a Fib projection at 18778, which is where the 5th wave (leg up from June 27th) of its rally from January would equal 162% of the 1st wave. That projection crosses a trend line along the highs from April-July next Wednesday, August 17th. Could we get an opex rally to get the Dow to achieve that level? At this point it's looking doubtful if only because the rally has lost so much momentum but it's only about a 200-point rally in a week's time, something that could easily be achieved if there remains enough money to counter any selling in the coming week. But a drop below the August 2nd low at 18247 would be a strong indication the top is already in place.

Key Levels for DOW:
- bullish above 18,800
- bearish below 18,247

Nasdaq-100, NDX, Daily chart

NDX got within 5 points of hitting its all-time high back in March 2000 at 4816.35. To fail there would be an epic fail and I have a hard time believing the manipulators would let that happen. I see a short-term pattern that suggests we'll get at least a larger pullback but bulls probably don't need to worry if NDX can stay above its December 2015 high near 4740. Below that would then risk a further drop to its 20-dma, near 4700, and its August 2nd low near 4689. Below that level would strongly support a top already in place and then it would be time to figure out if we're looking for just a larger pullback correction to the rally from June or something more bearish.

Key Levels for NDX:
- bullish above 4820
- bearish below 4689

Russell-2000, RUT, Daily chart

Last Friday the RUT tried to get through a trend line along the highs from June-July, which has stopped all rally attempts since July 12th, including the last attempt. Today's larger red candle looks like a firmer rejection at that trend line and leaves a significant bearish divergence on MACD against its highs since mid-July. It can still press higher but the rally is looking weak. It has plenty of support between here and the August 2nd low near 1198 and not until that 1198 low is broken will the bears have a better sense that a top is in place. That's the setup here but there's no confirming evidence yet.

Key Levels for RUT:
- bullish above 1250
- bearish below 1198

20+ Year Treasury ETF, TLT, Daily chart 10-year Yield, TNX, Daily chart

Since Monday's update for TLT it rallied back up to its downtrend line from July 8th today and pulled back. Its short-term pattern suggests a pullback before proceeding higher and there's still the possibility it will drop back down to the bottom of the down-channel from July 8th, currently near 134.50. But a break of its downtrend line with a rally above today's high at 140.51 would be bullish, which would be confirmed with a rally above its July 29th high since that would leave a 3-wave pullback correction from July 8th. A rally in bonds would likely put pressure on the stock market, which is why it's important to keep an eye on this ETF.

KBW Bank index, BKX, Daily chart

Monday's high for BKX, with the small poke above its downtrend line and then close below it (leaving a small spinning top doji at resistance), has been followed by a turn back down. This could be a significant reversal in the making or it will lead to just a correction to the rally from June 27th and then a continuation higher. I think price-level S/R near 66.50 remains the key level for the bears to break. This level supported the last pullback into the August 2nd low.

U.S. Dollar contract, DX, Daily chart

Last Friday through yesterday the US$ tried to get back above its 20-dma, near 96.40, but was unable to crack it and yesterday and today it gave up the fight and has pulled back, dropping back below its 50-dma at 95.62 in the process (it closed at 95.57). The bottom of an up-channel from May is near 94.60 so it would be a little more bearish below that level but in reality the dollar's pattern is a choppy mess and my expectation is for another choppy rally into September as it makes its way back up to 100.

Gold continuous contract, GC, Daily chart

While the dollar found its 20-dma to be resistance since testing it last Friday, gold found its 20-dma to be support and today managed a little higher bounce off that support level, currently near 1340. From a bullish perspective, although it requires another leg down for a larger pullback from July 6th, I can see a rising wedge pattern for the rally from December that would look best with another leg up (following a pullback to the uptrend line from December, near 1280. That possibility will have to be evaluated if and when gold drops down to its uptrend line. A drop below 1280 would be more bearish. If gold simply heads higher from here I continue to like a price projection near 1415, which is also where its downtrend line from 2011-2012 crosses the trend line along the highs from February-July.

Oil continuous contract, CL, Daily chart

Oil was also rejected by its 20-dma, and the top of its down-channel from June highs and now we watch to see its 200-dma at 40.54 will hold as support (today's low was 41.42) so it has a little room to run before testing support. A rally above yesterday's high at 43.52 would obviously be more bullish but at the moment the price pattern, down-channel and lack of bullish divergence suggest we'll see oil drop lower.

Economic reports

There were no market-moving economic reports this morning and there won't be any Thursday morning either. Friday's reports could move the market some but Thursday and Friday will be the start to the shenanigans that we often see in front of opex week.


The stock market has defied all odds that we'd see at least a pullback in August since the earnings news continues to get worse, not better. But with a strong Wall Street "interest" in keeping the market elevated into election season (Wall Street would rather Clinton than Trump) and the "good" news flowing from government reports (the political establishment clearly would prefer Clinton over Trump) we have to expect more "influence" in the market by those with a lot more money than you and I have. New market highs, despite the plethora of bad fundamental news for the market, tell us what we need to know about who's in control of the market. They make no denial anymore about the support.

The risk for market bulls, as I see it, is that the market has been propped up on the fluffy stuff of dreams and there's a big air pocket below the market. When the market starts down and big money can't stop it, HFTs will run for the shadows and most everyone is going to be looking to sell, but without any takers. The market is fun for the bulls until it's not and then I suspect it's going to be sheer panic and all the King's horses and all King's men are going to find it difficult to put the pieces back together again. This "free" market is anything but and the level of distortion will correct someday. The big question of course is the "when" part but keep in mind that the very low trading volume and low liquidity as a result of that could create problems sooner rather than later. Be careful out there.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Plays

Swimming Upstream

by Jim Brown

Click here to email Jim Brown
Editor's Note

The first six months of 2016 saw First Data make a new historic low in February and sellers tried again in May and June. Wednesday's close was a three-month high. The worst appears to be over.


FDC - First Data - Company Profile

First Data provides electronic ecommerce solutions for merchants, financial institutions and card issuers worldwide. The operate in three segments including global business solutions, global financial solutions and network & security solutions. This includes retail point of sale solutions, mobile ecommerce solutions and webstore solutions. They currently process 2,500 financial transactions a second across 118 countries.

First Data was taken private in 2007 for $26 billion by KKR. This debt ended up on the company's books and weighed them down for the last ten years. KKR helped them land a $3.5 billion private placement in 2013. That helped to reduce some of the high interest debt. KKR took them public again in 2015 and raised about $2.8 billion. That was the largest IPO of 2015. The company is still fighting the debt problem with $480 million in interest payments in the first half of 2016. Earlier this year we tried to short FDC because they were strangling under this debt. The situation appears to be improving.

In Q2 they reported adjusted earnings of 35 cents that beat estimates for 34 cents. It also beat the $26 million loss they took in the year ago quarter. Revenue rose 1.9% to $2.93 billion. Revenue in the global financial solutions division rose 12% to $395 million. This is their growth engine. They reduced their net debt by $300 million in the quarter.

Earnings Oct 26th.

Shares spiked from $12 to $13 after earnings and they are about to break over long-term resistance at $13.35. The weakness and volatility from the first six months of 2016 may be coming to an end. If FDC can move over that $13.35 level the next target would be around $16.50.

With a FDC trade at $13.50

Buy FDC shares, initial stop loss $12.65

Optional: Buy Oct $14 call, currently .55, no stop loss.


No New Bearish Plays

In Play Updates and Reviews

Not yet a Trend

by Jim Brown

Click here to email Jim Brown

Editors Note:

The minor selling on Wednesday was simple profit taking but it could turn into something worse. The minor declines in the major averages were just that, minor declines. One day does not make a trend but the market is due for a pause. This is August and the earnings cycle is winding down. Unless you are a fund manager trying to keep up with your peers there is no reason to buy this week.

The lows for the last half of the year typically come in Sept/Oct so there is likely to be a better buying opportunity ahead. The drop in the Nasdaq and Russell was caused by the 3% decline in the biotech sector. This sector had rallied strongly from the June lows and was due for a pause. With support at 3,100 it could continue to decline. Very weak guidance by Myriad Genetics (MYGN) was blamed for the drop. They said generic competition was heating up and drug prices were going lower.

Current Portfolio

Current Position Changes

No Changes

Profit Targets

Check the graphic above for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Stop Loss Updates

Check the graphic above for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

BULLISH Play Updates

CDNS - Cadence Design System - Company Profile


No specific news. Minor gain in a weak market.

Original Trade Description: August 3rd.

Cadence Design Systems, Inc. develops, sells, leases, and licenses electronic design automation (EDA) software, emulation and prototyping hardware, verification intellectual property (VIP), and design intellectual property (IP) for semiconductor and electronics systems industries worldwide. It offers functional verification products, including logic verification software that enables customers to coordinate verification activities across multiple teams and various specialists for verification planning and closure; and system design and verification products for hardware-software verification, as well as for system power exploration, analysis, and optimization. The company also provides digital integrated circuit (IC) design products, such as logic design products for chip planning, design, verification, and test technologies and services; physical implementation tools, including place and route, signal integrity, optimization, and double patterning preparation; and signoff products to signoff the design as ready for manufacture by a silicon foundry, as well as design for manufacturing products for use in the product development process.

Basically, Cadence is a software company that specializes in software to design chips and validate designs. They reported earnings of 29 cents compared to estimates for 28 cents. Revenue of $453 million beat estimates for $449.7 million. They guided for Q3 for revenue of $440-$450 million and earnings of 27-29 cents. Unfortunately, that was slightly lower than the $457 million and 31 cents analysts expected. They guided for the full year for revenue of $1.8 - $1.83 billion and earnings of $1.17 to $1.23. Analysts were expecting $1.824 billion and $1.21 per share.

The stock was knocked back from $26 to $24 after a strong run since January. Shares have stabilized at $24 and I expect their prior trend to continue. The guidance was conservative and analysts always over estimate.

Earnings Oct 25th.

Position 8/4/16 with a CDNS trade at $24.35

Long CDNS shares @ $24.35, see portfolio graphic for stop loss.

Optional: Long Sept $25 call @ 35 cents, no stop loss.

CUDA - Barracuda Networks - Company Profile


No specific news. Shares are holding over prior resistance at $21.25 but cannot seem to make a higher move.

This position remains unopened until CUDA trades at $22.50. The high today was $21.96.

Original Trade Description: July 21st., August 3rd

Barracuda Networks, Inc. designs and delivers security and data protection solutions. The company offers cloud-enabled solutions that enable customers address security threats, improve network performance, and protect and store their data. It provides various security solutions and Barracuda Web Security Gateway, a solution to protect users from Web-based threats. The company's security solutions also comprise Barracuda NextGen Firewalls to secure the network and optimize traffic flows; Barracuda Web Application Firewall to protect Web applications and websites from data breaches and downtime; and Barracuda Load Balancer ADC to optimize application performance, availability, and security. In addition, it offers data protection solutions, such as Barracuda Backup, Barracuda Message Archiver, and CudaSign, an eSignature platform. The company sells its appliances, services, and software products to education, government, financial services, healthcare, professional services, telecommunications, retail, and manufacturing industries through its sales personnel, distribution partners, and value added resellers in approximately 100 countries.

On July 7th the company reported adjusted earnings of 20 cents that easily beat analysts for 11 cents. Revenue of $86.7 million rose 11% and also beat estimates for $83.8 million. Recurring subscription revenue rose 20% to $65.3 million because of the success in moving to a cloud subscription model rather than appliance sales. Subscription revenue now represents 75% of all revenue. Active subscriptions rose 14% to over 286,000 customers and the renewal rate was 93%.

Earnings Sept 27th.

After the earnings shares spiked to $18.50 from $15. A day later they spiked again to $19.50 as analysts raised their guidance. Shares consolidated for about three days before beginning to trend higher.

We were stopped out of long position on 8/3 because I had the stop loss too tight. I believe CUDA will move higher after a period of consolidation at the current level. I am putting an entry point just over the current consolidation range.

With a CUDA trade at $22.50

Buy CUDA shares, initial stop loss $21.00.

NAVI - Navient - Company Profile


No specific news. Navient changed direction in a hurry after closing at a 6-month high on Friday. If Support at $13.50 breaks we will be stopped out.

Original Trade Description: August 6th.

Navient Corporation provides financial products and services in the United States. The company offers Federal Family Education Loan Program (FFELP) Loans, Private Education Loans, and Business Services. It holds the portfolio of education loans insured or guaranteed under the FFELP, as well as the portfolio of private education loans. The company also provides asset recovery services for loans and receivables on behalf of guarantors of FFELP loans, and higher education institutions, as well as federal, state, court, and municipal clients. They also offer business processing services on behalf of municipalities, public authorities, and hospitals. Navient was spun off from Sallie Mae in April 2014.

Adjusted earnings for Q2 rose 17.5% to 47 cents and beat estimates for 45 cents. Helping produce the earnings beat was a 44.4% decline in provisions for credit losses to $110 million.

During the quarter Navient acquired FFELP loans of $623 million bringing their total under management to $92.6 billion.

The private education loan segment reported earnings of $57 million. During the quarter Navient acquired another $23 million to bring their total under management to $24.7 billion. The spread on the private loans was stable at 3.66%. The charge off rate was only 2.2%.

During the quarter they retires $255 million in senior unsecured debt and they completed three ABS placements totaling $2.278 billion to raise liquidity. They repurchased 13.6 million shares for $175 million and had $360 million outstanding under the current authorization.

Earnings Oct 18th.

Although Navient is not a high flying investment like Apple or Netflix it is a good solid business. Friday's close at $14.50 was a 52-week high and a breakout over prior resistance. The next resistance will be a gap fill around $17 from last July.

Position 8/8/16:

Long NAVI shares @ 14.57, see portfolio graphic for stop loss.


Long Oct $15 call @ 50 cents. No initial stop loss.

RDN - Radian Group - Company Profile


Radian declared a dividend of $0.0025 per share payable Seept 7th to holders on August 22nd. My thoughts are "why bother?" Still stuck under $13.

Position remains unopened until a trade above resistance at $13.15. High today was $13.01.

Original Trade Description: July 30th.

Radian Group Inc. provides mortgage and real estate products and services in the United States. It operates through two segments, Mortgage Insurance, and Mortgage and Real Estate Services. The Mortgage Insurance segment provides credit-related insurance coverage, principally through private mortgage insurance that protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers, as well as facilitates the sale of these mortgage loans in the secondary mortgage market. It offers primary mortgage insurance coverage on residential first-lien mortgage loans. This segment primarily serves mortgage bankers, mortgage brokers, commercial banks, savings institutions, credit unions, and community banks. The Services segment provides outsourced services, information-based analytics, and specialty consulting services for buyers and sellers of, and investors in, mortgage- and real estate-related loans and securities, and other asset-backed securities. This segment offers loan review and due diligence, monitoring of mortgage servicer and loan performance, valuation and component services, real estate owned asset management services, and outsourced mortgage services. Radian Group Inc. was founded in 1977.

With the new credit rules borrowers have to have more money down and a higher credit score to qualify for a home loan. Even then there is sometimes the requirement for credit insurance to allow the loan to be sold in the secondary market. Radian provides the insurance and does the due diligence required to write the insurance profitability. They continue to monitor the mortgage servicers to prevent the loans from going to deep into default by being proactive.

In their recent quarter they reported earnings of 38 cents that missed estimates for 40 cents. However, shares went up because of the positive guidance. They are writing more insurance on better credits. They wrote insurance on $12.9 billion in loans, a 60% increase from the $8.1 billion in Q1. Of the loans written 57% of the borrowers have FICO scores over 740 compared to 26% in 2007. Only 7% of loans underwritten had loan to value greater than 95% compared to 24% in 2007. Some 86% of insurance in force is on new loans written after 2008. Because of the higher scores and the smaller loan to value on most loans they were able to reduce their loan loss reserves from $1.204 billion to $848 million.

They are paying off debt and redeemed a $325 million note. They had $718 million in liquidity at the end of the quarter. They authorized another $125 million share repurchase and the board authorized the early redemption of $196 million in senior notes due in 2017. In Q2 they also bought back $12.4 million of convertible notes due in 2019.

Earnings Oct 27th.

Despite the minor earnings miss the company appears to be doing everything right. Shares have risen for two consecutive days after their earnings. Resistance is $13 and they closed at $12.90 on Friday. If they break over that resistance the gains could accelerate.

With a RDN trade at $13.15

Buy RDN shares, initial stop loss $11.85.


Buy Sept $14 call, currently .20, no stop loss.

TWTR - Twitter - Company Profile


A judge in California dismissed a lawsuit accusing Twitter of supporting ISIS by allowing them to use the service. The judge said federal law protects companies that provide platforms for speech, without creating the speech itself. "As horrific as these deaths were, Twitter cannot be treated as a publisher or speaker of ISIS's hateful rhetoric and is not liable under the facts alleged." The suit was brought by relatives of two men killed in Jordan. Shares surged another 2% to $19.04 to close at a 5-month high.

Original Trade Description: July 6th.

Twitter, Inc. operates as a global platform for public self-expression and conversation in real time. The company offers various products and services, including Twitter that allows users to create, distribute, and discover content; and Periscope and Vine, a mobile application that enables user to broadcast and watch video live. It also provides promoted products and services, such as promoted tweets, promoted accounts, and promoted trends that enable its advertisers to promote their brands, products, and services; and subscription access to its data feed for data partners.

Twitter's monthly active users have flat lined for many months with almost no growth. New users come into the system, get confused and overwhelmed and then leave just as quickly. There was nothing "sticky" to keep them on the system unless they were a news junkie or addicted to the next wild comment from Donald Trump.

Twitter is trying to change that with Twitter Live. They are testing the concept this week with a live twitter video feed from Wimbledon. The video shows up in the left side of the screen and the right side has a running commentary of tweets on the topic. Twitter has already announced several live events they are going to stream. They paid $10 million to the NFL to stream 10 of the Thursday night games. Live news stories are also being tweeted.

Analysts have been pleasantly surprised and claim "this may actually be something useful from Twitter." If they can successfully transform themselves from a 140 character shorthand rant site into a site with thousand of live streams of everything under the sun then they may actually avoid obsolescence.

Shares have been rising since the $14 low on June 10th and appear poised to break over resistance at $18. By reinventing themselves as a live stream video portal they open up a significant advertising opportunity and could actually attract some big money buyers looking for a social media acquisition. Apple and Google are the permanent favorites constantly mentioned as possibly having interest. If they see that Twitter is suddenly becoming relevant again, they could pull the trigger.

This time last year Twitter was trading around $38 and their historic high was around $75 so even without an acquisition offer they could rebound significantly.

Twitter has been a slow mover even though it is up $3 in three weeks. If it were to move over that $18 resistance it could pick up speed as investors come back for a second or third look and realize the company is evolving.

Do not buy this with expectations for a quick bounce and out. If you enter this position, you should look for a slow move to $20 and then reevaluate the position. Over $20 could trigger some real short covering.

Earnings July 26th and we could hold over the event depending on the news flow and stock level.

Position 8/1/16:

Long TWTR shares @ $16.64, see portfolio graphic for stop loss.

Previously closed 7/28/16: Long TWTR shares @ $17.24, exit $15.89, -1.35 loss.
Previously closed 8/1/16: Long Aug $17 put @ 62 cents, exit .85, +.23 gain.

BEARISH Play Updates

INFY - Infosys - Company Profile


No specific news. Shares continue to tick slowly higher so I am cancelling this recommendation. It remains unopened having never traded down to $15.75.

Original Trade Description: August 4th.

Infosys Limited, together with its subsidiaries, provides consulting, technology, and outsourcing services in North America, Europe, India, and internationally. The company offers business information technology (IT) services comprising application development and maintenance, independent validation services, infrastructure management, business process management, and engineering services consisting of product engineering and life cycle solutions; and consulting and systems integration services, including consulting, enterprise solutions, systems integration, and advanced technologies.

Infosys is an Indian company that does business all over the world but it does have a heavy presence in Europe and the UK. Just before the company released disappointing earnings in July they issued a press release saying, "We do not know how Brexit will play out" but we are cutting our guidance anyway. At the same time, they warned they would miss prior estimates for Q2 "even though there was no Brexit impact so far." This would appear to be a case of using a convenient headline as an excuse for poor performance.

The company cut full year revenue growth guidance from 11.5% to 13.5% to 10.5% to $12.0%. They blamed a lack of visibility by banks as a potential reason they may see growth decline. When they reported earnings of 22 cents they missed estimates for 23 cents. Revenue of $2.5 billion also missed estimates for $2.55 billion. Remember, they said there had been no impact from Brexit so far so this was just a miss and they were setting up analysts for a future miss with the guidance cut.

Earnings Oct 14th.

Analysts were quick to downgrade the stock with Nomura cutting it from buy to neutral and Credit Suisse cutting from outperform to neutral.

Shares fell from $18.50 to $16.50 on the announcement and then traded sideways for two weeks. This week they have begun to decline and are only slightly above a new 52-week low. If they punch through the support at $16 they could go to single digits.

Recommendation cancelled

SKX - Skechers - Company Profile


No specific news.

Original Trade Description: August 1st.

Skechers U.S.A., Inc. designs, develops, markets, and distributes footwear for men, women, and children; and performance footwear for men and women under the Skechers GO brand name worldwide. It operates through three segments: Domestic Wholesale Sales, International Wholesale Sales, and Retail Sales. The company offers casual footwear, including boots, shoes, and sandals for men, as well as oxfords and slip-ons, lug outsole and fashion boots, and casual sandals for women; dress casuals, seasonal sandals and boots, and relaxed fit casuals for men and women; and casual fusion line for young men and women under the Skechers USA brand. It also provides footwear collection for men and women, including lightweight sport athletic lifestyle products, classic athletic-inspired styles, and sport sandals and boots under the Skechers Sport brand name; casual and sporty styles sneakers for females under the Skechers Active and Skechers Sport Active brand; and footwear for women and girls under the BOBS from Skechers name. They operate 1,548 stores with 1,144 outside the USA. They plan to increase that total count by adding another 200 stores before the end of 2016. They opened 133 stores in Q2.

In the recent Q2 cycle they reported earnings of 48 cents that missed estimates for 51 cents. Revenue rose 9.6% to $877.8 million. The revenue was a bigger problem than the missed earnings. Over the last three quarters they averaged a 27% increase in sales. The 9.6% rise was the worst quarter since Q3-2012. In the U.S. revenue actually declined -5.4% with most of the gains coming from overseas. Sales internationally rose 40% but the stronger dollar took a big bite out of profits. They also complained about a warehouse fire in Malaysia and additional VAT taxes in Brazil.

However, the biggest problem is the increased competition from Under Armour and Nike. UA is rapidly expanding its line of running shoes and Nike is increasing the variety of less expensive shoes after their $200+ offerings did poorly over the last two quarters. Under Armour announced it was going to launch a shoe dept in 1,100 Kohl's stores. That gives them broader exposure and it will be at a lower price point.

Skechers has a tough road ahead. They are trying to break into the highly competitive U.S. running shoe market and have been doing rather well but the big guys are determined to push SKX back to the sidelines.

Earnings Oct 20th.

Shares fell from $32 to $25 on the earnings and have continued to move to lower lows in a positive market. If the broader market rolls over the decline could accelerate.

Update 8/3/16: Skechers earned the "Bear of the Day" strong sell call from Zacks. The analyst said the consensus estimate for 2016 earnings had fallen from $2.11 to $1.81 in the last 60 days. The 2017 estimates had fallen from $2.53 to $2.05.

Position 8/2/16:

Short SKX shares @ $23.75, see portfolio graphic for stop loss.

Optional: Long Sept $22 put @ .55, see portfolio graphic for stop loss.

VSI - Vitamin Shoppe - Company Profile


No specific news. Shares continued to decline and are close to a 52-week low.

Original Trade Description: August 8th.

Vitamin Shoppe, Inc. operates as a multi-channel specialty retailer and contract manufacturer of nutritional products in the United States. It operates through three segments: Retail, Direct, and Manufacturing. The company provides custom manufacturing and private labeling services for VMS products, as well as develops and markets own branded products. It offers vitamins, minerals, herbs, specialty supplements, sports nutrition, and other health and wellness products of approximately 800 brands. The company sells its products through Vitamin Shoppe, Super Supplements, and Vitapath retail stores; and catalogs, as well as through its vitaminshoppe.com Website. As of March 1, 2016, it had approximately 700 company-operated retail stores.

The company reported Q2 earnings of 55 cents that missed estimates for 59 cents. Revenue of $332.7 million narrowly beat estimates for $331.6 million. The CEO warned, "The external environment was more promotional and volatile than we had anticipated and we responded by increasing our promotional activity. As a result, our performance for the quarter was mixed, with improved comps offset by lower margins. The positive comps in the quarter reflect the benefits of some of our new initiatives as well as stepped up promotional activity. In addition, our manufacturing business is performing below expectations with lower sales and margins, which also contributed to our overall weaker performance in the quarter." I was not a glowing report. He also said, "Given the current operating environment with variability from day to day, we have put in place a dedicated effort behind more aggressive cost controls and margin realization. Our goal will be to achieve the appropriate balance between revenue growth and profitability." That is a good example of a CEO trying to put a positive spin on a negative environment. Shares declined after his comments.

Earnings Nov 2nd.

I am a vitamin junkie. I cringe every time I have to buy a bottle of something that costs $50 to $75 and I am sure the normal consumer is also suffering from sticker shock when they see those prices. Obviously, you can buy the generic chemical equivalents for a lot less but if you are trying to buy the best quality formulations, it is expensive. Add in all the competition from the multilevels like Thrive and the vitamin boosted meal replacements from brands like Vega and the consumer has so many choices they can't make up their minds. All the chain stores like Kroger, Whole Foods, etc, are now carrying complete inventories from multiple competitive brands at discounted prices. This gets back to the "promotional environment" the CEO was talking about.

Since the earnings drop on July 28th shares have declined $5 and are currently struggling to hold support at $27.50 that dates back to May. A breakdown there targets $26.25 and the 52-week lows. If VSI does make a new low, I think we could see a significant drop. Vitamin Cottage (NGVC) is already at $12 and dropping after hitting highs over $40 at the same time VSI was hitting $65.

Position 8/9/16 with a VSI trade at $27

Short VSI shares @ $27.00, see portfolio graphic for stop loss.

If you like the trade setups you have been receiving and you are on a free trial then now is the time to subscribe. Do not wait until you miss a newsletter to decide you want to take the plunge.

subscribe now